Enigma of BYD’s Valuation

Ichiro Suzuki

The automobile industry is going through the biggest changes since its birth around the turn of the 20th century. Environmentally friendly electric vehicles are replacing the ones that run on internal combustion engines (ICE) that emit carbon. The transition may be progressing more slowly and in a messier fashion than expected perhaps ten years ago, but it is still steadily moving forward. Tesla led the industry in the early stage of the transition. Then, China laid out an industry policy to make EVs a core part of ‘Made in China 2025’ that promotes manufacturing industries across the board. Having not been able to catch up with the incumbent ICE car makers, China decided to leave legacy cars to them and concentrate resources on EVs. Results have been spectacular. In the world’s largest car market, EVs took off in a breathtaking speed after the pandemic. Today, EVs including battery electric vehicles (BEVs) and plug-in-hybrid electric vehicles (PHEVs), account for 53% of all passenger car sales in China. BYD leads the pack of over 130 Chinese car makers, with 4.2 million vehicles sold in 2024. Selling only BEVs and PHEVs, BYD is already No.7 in the global rankings. On top of EVs’ rapid take-off in China, car makers there are competing fiercely for development of software-defined vehicles (SDVs), which makes moving people from point A to B only a fraction of what they offer. Competition among them is so intense that they are apparently a step ahead of the incumbents that have ruled the world over the past decades. 

Then, BYD, the best of the Chinese EV makers is given market capitalization of $150 billion, a fraction of Tesla’s trillion dollars. BYD has overtaken Tesla in EV sales in China. Even worse, CEO Elon Musk’s erratic behavior on the political front has disillusioned its customer base that is more liberal than typical car buyers, leading to sharp falls in Tesla car sales in the U.S. and Europe. If that’s not enough, BYD is considerably smaller than Toyota Motor’s $230 billion. Toyota is the champion of ICE cars, and is evidently behind BYD in EVs.  

Is the market wrong either on BYD or Tesla? Maybe, but the gap between the two has been consistently large for several years. Musk’s DOGE assault wiped out half of Tesla’s market value in four months, but then it rebounded to a tech valuation of trillion dollars. Though the market is capable of mis-pricing assets, wrong prices would last only for a brief period of time before they get corrected. Then, what’s the market thinking behind the pricing that doesn’t treat BYD as a tech company? It may be some of the following: 

One; Not profitable enough 

Based in the market that is fiercely competitive, BYD’s long-term profitability might be considered as a concern. It is a fine car maker operating in a terrible market. Of the 130+ EV makers in China, only a handful of them are generating profits at present. This represents a typical industry with over capacity that plagues the Chinese economy today. Low interest rates due to persisting mild deflation allow unprofitable zombies to stay in business, making it difficult to consolidate the industry. BYD would have to operate in this environment much longer than they want. 

Two; Insufficient safety considerations 

Amid cutthroat competition for getting ahead in advanced technology, safety may have taken a back seat for Chinese car makers. In fact, the government has recently expressed its concern on safety, especially at a time when they are moving toward driverless cars. Taking safety more seriously would add extra costs, weighing on their bottom line and balance sheets. Of course, safety regulations are quite stringent outside of China, pressuring profitability in the event of expansion in the developed world markets.

Three; Potential balance sheet problems 

It has been said that Chinese EV makers have been pressing their suppliers to accept very aggressive terms of payment, taking advantage of their superior positions. Such a practice over the years might have accumulated a large amount of hidden liabilities on their balance sheets if they were constructed on more conventional terms of payment practices. The government is asking car makers to ‘normalize’ their relationship with suppliers. Doing so quickly could unveil rather inconvenient truths about their financial statements as well as reduction of profits or aggravation of losses. (Normalization could also lead to weeding out of fringe car makers.)

Four; Can they really capture the developed world markets?

The U.S. government would certainly not allow Chinese EVs to roam on American roads. Cars run on Chinese software would definitely be considered as a security risk in the U.S. Chinese EVs are already making inroads into Europe, which is more receptive to EVs as well as Chinese cars. The EU, however, is already moving to raise the hurdle on them, for fear of becoming a dumping ground of subsidized and over-produced and Chinese cars.

Five; Does China’s current lead matter that much in the long run?

Transition to EVs is turning out to be much messier and is taking place much more slowly than originally expected. This gives time to the incumbent car makers to play catch-up. This is probably why shares of Toyota has been holding up relatively well despite their late start in EVs. Rapid technological progress toward software defined vehicles (SDVs) could slow down at some point down the road, as is often the case with other technological developments. After all, ‘smartphonization’ of cars can go only so far. Buyers of cars are overwhelmingly middle-aged or older men and women as opposed to twenty somethings who are willing to stand in a long cue for a latest model of iPhones. Middle-aged people are less likely to be overzealous about a gadget’s dazzling latest features, even on smartphones. On cars they drive, they make much greater financial commitments with a longer period of association with the product. They would take other factors more seriously making other factors than dazzling features more important. Other factors can be safety, reliability, comfort, etc., into which incumbent carmakers have invested heavily over the decades. This is the case at least outside of China, and could help incumbents to compete in a changing market. 

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.